Retirement plan strategies: finding the right balance; Expert advice on the implications, pitfalls and opportunities offered by the Pension Protection Act of 2006 is summarized by Financial Executives Research Foundation (FERF).

• Author: de Mesa Graziano, Cheryl
• Position: Pensions

Picture retirement funding as a three-legged stool comprised of employer contributions, employee savings and Social Security. Now, imagine how that would change with primary reliance shifting on employee savings and Social Security, with the employer acting more as a facilitator ...

With the enactment of the Pension Protection Act of 2006, one thing is certain--companies are more focused on identifying the right retirement plan for their employees. But, the jury is still out on whether the right retirement options include defined-benefit (DB) plans, defined-contribution (DC) plans, cash balance plans--or a mix of more than one.

"On both the defined-contribution and defined-benefit side, the Act provides more rules, more disclosure and reporting," says Alan Glickstein, senior retirement consultant at Watson Wyatt. "And, although there are some things here to like and some not to like, at least now you know what the rules are."

Changes to Defined-Benefit Plan Funding

The new defined-benefit funding rules, effective for plan years beginning after Dec. 31, 2007, establishes a funding target of 100 percent. A special transition rule applies through 2011 if the plan is 92 percent, 94 percent or 96 percent funded in 2008, 2009 and 2010, respectively.

For employer contributions to existing plans, the Act provides higher caps that are further increased for employers that maintain both a DC and DB plan. For plans beginning in 2006 and 2007, the law increases the maximum deductible amount from 100 percent to 150 percent of current plan liabilities. These factors are expected to result in both increased and more consistent funding.

Plans with less than 80 percent funding are considered "at risk" and are subject to even stricter funding requirements. At-risk plans must assume employees eligible to retire in the next 10 years will retire as early as possible, and that employees will leave an organization at the time when the present value of their benefits are at their highest.

Arthur L. Conat, executive director, Ernst & Young LLP Performance and Reward, warns that acquisitive companies need to be concerned about taking on at-risk plans. "When an organization has an at-risk plan in its controlled group, the organization may find more restrictions in funding nonqualified benefits. This could disrupt funding for other nonqualified programs. The law has no exception for newly acquired plans."

For 2006 and 2007, the interest rate used to value pension liabilities will remain based on investment-grade corporate bonds. Starting in 2008, the rate will be based on a three-segmented yield curve, developed from a 24-month average of the yield on the top three grades of corporate bonds. And, though plan assets are generally valued at the fair market value on the valuation date, asset value may also be averaged over 24 months, a decrease from the 60-month average allowed before the Act.

Since plan assets and liabilities will be reflected more on a mark-to-market...